Category Archives: China-U.S.

Trump’s 3-D Re-engagement with Asia: Development, Defence and Diplomacy

THE BELT AND Road Initiative and the United States’ vision for the Indo-Pacific have a common end if different means.

Both are critical components of establishing the two powers’ respective influence over a region that is already well on its way to becoming the world’s economic centre. The former uses state-led infrastructure; the latter seeks to unleash the commercial might of private business, primarily US private business.

The Trump administration’s withdrawal from the Trans-Pacific Partnership, one of its earliest acts, cemented regional fears among the United States’ allies that the ‘America First’ rhetoric of the Trump campaign in 2016 presaged US withdrawal from the region, leaving a vacuum that China would need little encouragement to fill.

Whatever the validity of that fear — and US commercial imperatives were always going to mitigate against significant disengagement — Washington has had a struggle to reassure its traditional regional allies, who, after all, still have to live cheek-by-jowl with their huge neighbour, regardless of the tweet-du-jour coming from Washington.

The uncertainty surrounding the outcome of both Trump’s putative trade war with Beijing and his intervention in North Korea through a summit with North Korean leader Kim Jong-un have kept nerves taught.

While the political scientists hijacked the term Indo-Pacific from the marine biologists and oceanographers slightly more than a decade ago, it has only been over the past five years than it has gained currency with political leaders in the four key Into-Pacific powers, the United States, India, Japan and Australia. In the past year, it has started to take shape as an economic entity.

Today, US Secretary of State, Mike Pompeo, put some more flesh on those bones by announcing $113 million of investment in technology, energy and infrastructure investments in the region. This was, he said, a ‘down payment’ on a new era of US economic commitment to peace and prosperity in the region.

US officials say that this commitment is not aimed at countering the Belt and Road Initiative, but the underlining of the transparent and commercially led nature of the investments and the choice of phrases such as ‘strategic partnerships, not strategic dependence’ speak for themselves, as does Pompeo’s assertion that the United States would oppose any country that sought to dominate the region.

The money will go to improving partner countries’ digital connectivity and expanding US technology exports to the region ($25 million), helping regional energy production and storage (some $50 million) and creating a US government agency to support infrastructure development ($30 million). Much of the remainder of the money will go to a fund to let regional nations access US private legal and financial advisory services.

There will not be, it seems, a return of the United States to TPP. Pompeo said that the Trump administration would only be doing bilateral trade deals in the region.

He did, though, trail a coming announcement by US President Donald Trump on regional security assistance, reaffirming the administration’s emerging three-D approach to the region: development, diplomacy and defence.

Compared to, say, the $62 billion that China is providing for the China-Pakistan Economic Corridor and the estimated $1 trillion of Belt and Road Initiative projects underway, $113 million looks like small beer, and especially as much of the money will end up delivering export sales of goods and services to US firms. An America First foreign policy is still an America First policy.

The question becomes then, can US business leverage that into a credible competitive alternative model for regional development. Washington’s traditional regional allies will still take some convincing as much as they would like to have a strong counterweight in the United States to China’s growing regional power and influence.

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US States Most Hit By Chinese Tariffs May Not Matter Much Electorally

IT FITS WITH US President Donald Trump’s maximalist approach to most things that he has now said he is ready to impose tariffs on everything China sells to the United States — all $500 billion worth.

For those keeping score at home, Washington has currently announced tariffs on $200 billion of China’s exports, to be imposed in September, having started at $3 billion-worth introduced in March, followed by $46 billion announced in April and imposed in July, with $50 million in effect currently.

Beijing, for its part, has retaliated with tariffs on $50-billion of US exports, of which $34 billion have been in place since July 6.

It has been often said that Beijing has targeted US goods for political impact at the state level to apply leverage against the Republican administration. However, our man in Washington points out that those US states that are most affected by the tariffs imposed so far by China are not especially salient to Republicans’s prospects in November’s midterm Congressional elections in the United States, as the table below shows.

State % total exports affected by Chinese tariffs to date Senate House: No of Republicans at risk
Alaska 16.1 No election 0
Alabama 11.2 No election 0
Louisiana 10.0 No election 0
South Carolina 8.0 No election 0
Washington 6.9 Safe Dem 1
Illinois 3.2 No election 2
Kentucky 3.0 No election 1
Virginia 2.6 Safe Dem 4
California 2.3 Leans Dem 0
Maine 2.2 Safe Ind/Dem 0

Such is the scale of US-China trade that there is, of course, much scope for that pressure point to be intensified, and it may be that the impact of US tariffs on US multinationals’ supply chains will prove more politically impactful in Washington.

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No Endgame In Sight As China-US Trade Tension Escalates

THE SLIDE IN commodity prices over the recent day or so portends investor concern about the prospects for and impacts of a US-China trade war that has yet entirely to materialise in currency and equities markets.

Energy markets, in particular, are skittish. Between them, China and the United States account for one-third of world oil demand, which will fall if the spillover from the trade measures taken so far slows global economic growth. Traders are also starting to speculate about the possibility of a seismic realignment of global energy markets should China price US energy out of its market.

Metals markets were also hit, as China is the biggest consumer of most metals, used as raw materials for its exports. Similarly, agricultural commodities, such as soybeans.

The White House announced on Wednesday an additional $200 billion-worth of tariffs to be introduced in September at 10% on for the most part Chinese consumer-goods exports, but also components and semi-manufactures.

Beijing’s reaction was predictably along the lines that Washington’s trade actions would hurt everyone; seventy of the top 100 exporters from China are foreign companies, Zhu Haibin, chief China economist at JPMorgan, told the Financial Times.

The commerce ministry said that it would have no choice but to respond to the latest US move. It also said that it would take the matter to the World Trade Organization, a jibe at US President Donald Trump’s reported wish to remove the United States from the world trade body but not one that veers too far from the generally measured tone taken so far (to the point of sanctimoniousness).

A question for this Bystander is, what is the Trump administration’s real endgame?

It says the tariffs are to get China to end its ‘unfair’ trade practices and open its markets. But the president in his public comments has fixated on the size of the US merchandise trade deficit with China. That would imply a grand trade deal between the two nations that would reduce the headline number of that deficit.

That would give the US president a trade war win that would be straightforward to promote to his electoral base. However, there is no sign at this point of such a deal being in the making.

But it would not solve the other complaint that the United States has against China, over technology transfer, both as a quid pro quo required by China for foreign firms for market access or through straightforward theft of intellectual property.

Washington has a legitimate case on both fronts. It might be able to use its trade war as leverage to get concessions on the first, under the rubric of a deal over market opening.

However, tariffs do little to remedy the second. With technology development so fundamental to China’s economic future, Beijing will hold out to the last over striking any deal that would be effective in curtailing something that it anyway denies doing.

In 2015, President Xi Jinping reached a ‘common understanding’ with Trump’s predecessor President Barack Obama that their governments would hold back on cybertheft of intellectual property for commercial gain.

The formulation was always vague — Xi’s definition of its scope was much narrower than Obama’s — and there was no formal mechanism of verification or enforcement. Both that and its provenance would prevent its embrace by the current US president.

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When Elephants Fight, It Is The Grass That Suffers

 

THE WHITE PAPER on China’s membership of the World Trade Organization (WTO) since it acceded to the world trade body in 2001 released by the State Council Information Office on June 26 implicitly acknowledges how much China has benefited from its membership.

This is all couched in terms of how China has lived up to its membership obligations and is now championing global free trade — an unabashed riding on the coattails of the global backlash against the United States’ protectionist turn.

The latest step in that come today with US tariffs of 25% on $34 billion worth of Chinese goods from ball bearings to lithium batteries coming into effect and China retaliating by imposing a similar 25% tariff on 545 US products, also worth a total of $34 billion, and likely to focus on agricultural products.

US President Donald Trump had previously threatened a 10% levy on an additional $200 billion of Chinese goods if Beijing’s trading practices remain unchanged, and raised the stakes on Thursday by saying that more than $500 billion of Chinese exports could be tariff targets.

Should that happen, Beijing may resort to non-tariff retaliation in forms such as more expensive and lengthy customs inspections and consumer boycotts of US products, as it did last year to South Korea’s Lotte Group.

That would be a display of patriotic citizen loyalty that the United States would be unable to match and may point to the Achilles’ heel of Trump’s belief that he can push hard on trade because the U.S. holds the strongest hand and thus the rest of the world will, ultimately, back down.

Two days before the imposition of these latest tariffs, the WTO reported that in the seven months to May, trade restrictions imposed by the G20 had doubled over the previous reporting period. These include tariff increases, stricter customs procedures and imposition of taxes and export duties.

In a nod to its purpose, the WTO noted that during the seven months reported on (so they do not include the latest tariffs), trade liberalisation measures taken by G20 members covered $82.7 billion of trade, versus the $74.1 billion affected by trade restrictions. But the gap is narrowing rapidly.

The WTO’s report is blunt in saying that further escalation of protectionism — measures and rhetoric — could carry potentially large risks for the global trading system itself:

At a juncture where the global economy is finally beginning to generate sustained economic momentum following the global financial crisis, the uncertainty created by a proliferation of trade restrictive actions could place economic recovery in jeopardy. The multilateral trading system was built to resolve such problems and it has the tools to do so again. However, further escalation could carry potentially large risks for the system itself. Its resilience and functionality in the face of these challenges will depend on each and every one of its Members. The G20 economies must use all means at their disposal to de-escalate the situation and promote further trade recovery.

Trump’s antipathy for the WTO — beyond a general belief that all multilateral organisations exist to do down the United States — is that it has provided China with a mechanism to create the vast trade surpluses with the United States on which he is now waging trade war.

Our man in Washington tells us that in private Trump repeatedly says that United States should get out of the WTO because it is anti-American and recalls the president on the campaign trail in 2016 calling the WTO a “disaster”.

Perversely, because the US-created the system and has lots of effective lawyers at the WTO, it does better than most when it comes to dispute resolution at the WTO. According to this year’s Economic Report for the President, the US has had an 85.7% success rate in cases it has initiated before the WTO since 1995, compared with a global average of 84.4% and China’s 66.7%. And it wins 25% of the cases brought against it, compared to the overall average successful defence rate of 16.6%.

Whether Trump would push the destruct button on the WTO remains an open question, though he is constrained to an extent in that the US Congress would have to pass legislation for the United States to leave the organisation.

Doing so would send both world trade and world financial markets into a tailspin. Stockmarket indices are scoreboards that get Trump’s attention. A deal to ‘fix’ the WTO might appeal more to him, especially if markets react badly to this latest round of tariffs.

For all the rightful concern, the US tariffs so far are tiny in the global scheme of things, affecting the equivalent of 0.6% of global trade and accounting for 0.1% of global GDP, according to Morgan Stanley.  The collapse of the WTO would be on an altogether greater scale.

Meanwhile, Beijing will continue to play its long game and to occupy the moral high ground over the WTO, its belief in its ability to outlast Trump as unshakeable as Trump’s belief that it cannot.

 

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Not-So-Easy Trade Wars

TRADE WARS MIGHT, as US President Donald Trump says, be easy to win (although this Bystander, for one, doubts it), but some of the terrain that has to be to yomped across is complicated and treacherous. Take the example of semiconductor equipment manufacturers.

The direct costs that result from the tariffs the United States is imposing on China and the ones that China is imposing on US firms in retaliation would be unwelcome but manageable for the three leading listed US semiconductor equipment manufacturers, Applied Materials, Lam Research and KLA-Tenco.

The trio’s China business earned them $5.4 billion in the year to end-March, 2018, according to calculations by the rating agency Moody’s. That was equivalent to 18% of their total revenue. Although that was 41% up on a year earlier, their business overall seems to have been growing at a similar rate.

These are good times to be making the equipment that makes chips, as it should be given global chip sales have increased by one-third since 2016, and are forecast to be a $460 billion market this year.

This is where things start to get complicated for trade hawks. Only about one-third of the three US firms’ China revenue comes from indigenous Chinese chipmakers, Moody’s reckons; the balance comes from multinationals that manufacture semiconductors in China, such as Intel and Samsung. (That is in line with the overall rule of thumb that holds that about two-thirds of world trade is accounted for by value and supply chains.)

US-based multinational chipmakers manufacturing in China could apply for US exemptions from US tariffs for the components they export back to the United States, though that would do nothing for reducing the headline trade deficit figure by which the US president sets so much score.

China could even ban such export sales. There is no indication Beijing is considering doing so should it come to it, but who knows what symbolic gestures will be made?

Absent a trade war, US semiconductor equipment manufacturers could expect steadily growing sales in China both to indigenous and multinational companies. Prospects would be particularly bright for the next several years among Chinese companies as Beijing is pushing the development of an indigenous chipmaking industry under Made in China 2025 to wean the country off its dependence on the United States for this critical technology. China will make its own chips first, then later the equipment to make them.

In the event of a trade war, Moody’s estimates, the three would lose $660 million of business from Chinese companies this year and $775 million in 2019.

At the end of this month, the Trump administration is set to announce new rules to curb Chinese access to critical US technology. While investments in the United States by any company with at least 25% Chinese ownership will be at the forefront, restrictions on exports of technology by US firms are also likely.

Limits to the three US firms’ freedom to sell their chipmaking equipment to Chinese companies would be a significantly more serious threat to them than tariffs. That might be appealing to the Trump administration as a way of delaying China’s drive to self-sufficiency in chip-making. There are no ready alternatives to the three US companies to which Chinese firms can turn.

But that, in turn, could force China to speed up the development of its own manufacture of semiconductor-making equipment.

So who wins? There is no uncomplicated answer.

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When Declaring Victory Is Not The Same As Wining A Trade War

Made in China label. Photo credit: Martin Abegglen, 2010. Licenced under Creative Commons.

CHINA HAS IMMEDIATELY retaliated against the first tranche of the 25% tariffs on $50 billion a year of Chinese exports to the United States announced by the Trump administration.

China will impose an matching tariff on 659 categories of US imports worth $50 billion a year, effective July 6. Vehicle and aircraft parts and vegetables account for the bulk of the targeted imports.

The Trump administration on Friday said its tariffs would come into effect on July 6 and cover more than 800 types of Chinese exports worth $34 billion a year. The largest category of goods affected are machinery, mechanical appliances and electrical equipment (full list). The White House says the remaining $16 billion of exports to be targeted will be announced later.

It is imposing the tariffs for what it deems unacceptable and unfair intellectual property and technology transfer practices by China that it has said cost the US economy $225 billion-600 billion a year.

There is, however, careful calibration on the United States part of these actions. It has reduced its original list of 1,300 targeted categories to focus on those sectors Beijing is promoting as part of its ‘Made In China 2025’ plan to develop advanced industries and to minimize the impact through international supply chains on domestic US industries. Some of the 500 categories removed from the list were done so following lobbying by US importers.

Beijing, for its part, has taken aim at the most politically sensitive US industries. where it believes it can have most impact on US President Donald Trump’s electoral support in rural areas and the Rustbelt.

US restrictions on Chinese firms’ investment in the United States are expected to be announced at the end of the month.

The president’s advisor on trade and manufacturing policy, Peter Navarro, says that the ‘era of American complacency’ on trade is over. But there is an old adage about how generals always fight the last war. The Trump administration’s tariffs seem to be doing the same thing.

International supply chains mean much of the value of the goods China exports is not added in China, so they hurt the non-Chinese part of the supply chain as much or more as the Chinese part.

Furthermore, policymakers may not care too much if the United States tries to choke off the sales of its cheap products; they want Chinese companies to export the higher value-added goods the US actions will push them towards making (and they have plenty of alternative markets in which to sell both cheap and more expensive products; the US accounts for only one-quarter of China’s exports).

Meanwhile, China’s industry has developed to the point that in sectors such as artificial intelligence and autonomous vehicles it is already internationally competitive. Intellectual property protection is now more important to its companies than intellectual property theft.

Trump may end up declaring victory in this particular trade war by being able to show he is being ‘tough on China’ and cutting the headline number of the bilateral goods trade deficit, but it will be China that actually wins the war.

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China Can Be Content With The Trump-Kim Singapore Summit

 

North Korea leader Kim Jong Un (left) and US President Donald shake hands in the summit room during the DPRK–USA Singapore Summit, June 12, 2018. Photo credit: By Dan Scavino Jr. [Public domain], via Wikimedia Commons.

THE SINGAPORE SUMMIT between US President Donald Trump and North Korea leader Kim Jong Un was a quick-fire and highly choreographed affair, genuinely historic in just happening, but long on symbolism and short on substance.

It may turn out to provide the basis for the eventual denuclearisation of the Korean peninsula, though an equally long-term success would be the integration of North Korea into the international order as a nuclear power that played by international rules and norms.

Alternatively, it may all fall apart in time, as history provides some precedent.

But potentially it is a ‘reset moment’, although this Bystander is not alone in having no idea what Kim’s long-term game is.

For now, China will be pretty happy with where things stand. Kim has given nothing away that would concern Beijing. Meanwhile, the US president has tacitly followed the ‘suspension for suspension’ approach Beijing suggested all along once it was clear that the dormant six-party talks framework was going to be replaced by bilateral talks between Washington and Pyongyang.

Trump’s statements at a post-meeting press conference that the US would suspend its joint military exercises with South Korea and that the president would like US troops to leave the peninsula eventually (neither of which proposal was in the statement the two leaders signed at their meeting) would have delighted China. Beijing has long wanted a scaled-down US military presence in the region.

So, too, would Trump’s promise of security guarantees for the North Korean regime — China wants no outcomes that lead to either the unification of the Koreas or the collapse of the Kim dynasty, either outcome of which risks putting US or US-allied troops on its Manchurian border.

It will, no doubt, take the occasion when it arises to remind Seoul that Trump considered the joint exercises, or ‘war games’ as he called them, too expensive. From there, it will not be too far a stretch to put the idea in Seoul’s mind that the US president could have been suggesting that South Korea would be too expensive to defend in general.

Senior US officials, alive to the broader security implications of that for Japan and in the South China Sea, were quick to row back on that.

Most importantly for Beijing, no detailed plan or process for managing North Korea’s nuclear and missile programmes was laid out at the summit. The only commitment was to hold follow-on summit implementation negotiations, led by U.S. Secretary of State, Mike Pompeo, and an unnamed ‘relevant high-level [North Korean] official’.

This opens the door for all the interested parties, especially China, to turn that into an international effort for what will necessarily be a detailed and painstaking process of inspection and verification if the US aim of ‘complete, verifiable and irreversible denuclearisation’ is to be achieved. The considerable volume of regional diplomacy that has been underway for some months is, in a sense, preparation for that.

“A good beginning is half done,” a foreign ministry spokesman, said of the summit, adding that China wished to “support the two sides to implement the consensus reached by their two leaders, promote follow-up consultations, further consolidate and expand the achievements, and make the political settlement of the peninsula issue a sustainable and irreversible process”.

In other words, it wants a seat at the table. China has a pivotal role to play in as much as it has the critical hand on dialling up or dialling down the enforcement of international sanctions on North Korea.

Pompeo will visit Beijing on Thursday when Beijing’s ‘support’ will immediately be made available.

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